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Company Man to the End, After All

IT has become an indelible moment of the recent corporate scandals: Kenneth L. Lay, then chairman and chief executive of Enron, encouraging employees in the summer of 2001 to buy company stock, even as he was secretly unloading much of his own stake.

Mr. Lay's representatives have always denied that he had any ill intent, arguing that the sales resulted from margin calls on his collapsing portfolio. But his critics remain unmoved.

Enron employees accused him of betrayal. Members of Congress demanded his indictment on insider trading charges. The event even figured in a recent television movie about Enron as evidence of corruption at the company's very top.

But this story of a hypocrite unmasked suffers from one significant flaw: it appears to be untrue.

A review of previously undisclosed personal records -- including years of trading, accounting and other documents -- as well as interviews with Mr. Lay's financial advisers and other witnesses in the government's investigation indicates that Mr. Lay retained his faith in the company virtually until its collapse.

Ultimately, people involved in the investigation say, the records -- many of which were provided by people sympathetic to Mr. Lay -- have transformed what appeared to be an open-and-shut case of criminal insider trading into a more complex mosaic of hubris and financial recklessness. Indeed, outside experts who were told of the data said, the case seems far less likely to support charges of the type once imagined.

''This would be a case that the government would normally shy away from,'' said John C. Coffee Jr., a securities law expert at Columbia University.

None of this means Mr. Lay may not ultimately face criminal charges. Prosecutors may decide that he structured his selling to hide his actions improperly from the market or was aware of nonpublic information that should have led him to halt his trading. They could also conclude that he is criminally liable for some other element of Enron's collapse. But prosecutors are said to be close to a decision on whether to charge Mr. Lay, and there has been no indication that they have pursued other avenues.

With his investment blunders, Mr. Lay joined a group of chief executives -- including Bernard J. Ebbers of WorldCom and John J. Rigas of Adelphia Communications -- who structured their finances with an apparent view that their companies would never stumble. Each borrowed heavily on his stock, each left his job amidst scandal, and now -- after years of cultivating images as a brilliant corporate strategist -- each must rely on admissions of his own shortcomings to defend decisions that now seem incomprehensible.

But Mr. Lay, who declined to comment for this article, would be able to marshal reams of records to provide proof that he was caught unaware by his company's downfall.

He appears to have managed both his personal finances and Enron in much the same way: with a belief that the market would never turn sour. Both Mr. Lay and the company financed deals and investments with Enron stock, with provisions requiring the price to stay above certain levels. When those price triggers were hit, his finances and the company's began to fall apart.

Mr. Lay sold many Enron shares in 2001 -- almost $100 million worth. Often, he sold them back to the company, a mechanism that delayed disclosure.

IT is those furtive transactions -- particularly sales in late August 2001, after Sherron S. Watkins, an Enron executive, raised concerns of improprieties -- that have led to the harshest criticisms of Mr. Lay.

But the records indicate that he went to great lengths to hang onto Enron shares, even as the debacle unfolded.

They show that Mr. Lay maintained a risky -- some would say foolhardy -- trading position, pledging virtually his entire portfolio of liquid assets, dominated by his huge Enron stake, as collateral against bank and brokerage loans used to make other investments.

Such a position can be profitable as long as the value of the pledged stock goes up, with the shares then available to pay off borrowings. But if values go down, as happened at Enron, it can result in forced sales.

Mr. Lay, with little additional collateral, made just such sales to pay down tens of millions of dollars in debt. No proceeds were used for any other purpose, the data show.

The evidence suggesting that Mr. Lay continued to believe in Enron shares in 2001 is substantial:

* When the falling stock price left him with too little collateral for his loans, he took several steps to delay selling Enron shares, like selling other investments and persuading a bank to accept an illiquid investment as collateral.

* That summer, Mr. Lay converted more than 200,000 Enron options into stock, but did not sell the shares. A result was a tax liability of several million dollars for an investment that proved worthless.

* That July 31, Mr. Lay stopped daily sales of Enron shares begun the year before under a Securities and Exchange Commission program for corporate insiders. A financial adviser said Mr. Lay believed the stock price was too low.

* In late September, before the crisis hit, Mr. Lay used a $10 million incentive payment to pay down some bank loans, essentially using cash to forestall the further forced sale of Enron shares.

* About the same time, Mr. Lay began to sell and even abandon private equity investments that required him to post additional cash -- money he could have raised by selling Enron shares.

All told, experts said, the records indicate that Mr. Lay believed what he said when he told employees the stock was a good buy in August 2001.

''That trading pattern is consistent with Ken Lay sincerely believing that Enron stock had reached a trough and had nowhere to go but up,'' said Kevin J. Murphy, who specializes in executive compensation at the Marshall School of Business of the University of Southern California.

That differs sharply from the story put forward early last year, after many news organizations, including The New York Times, reported that Mr. Lay had sold large numbers of shares as he urged others to buy. Many people seized on those facts as evidence of duplicity, not accounting for other possible explanations.

Still Mr. Lay was not wiped out in the collapse, though his wife, Linda, lamented in early 2002 that the family had lost everything. He retains $3.8 million in marketable investments, records show -- down from $339 million in early 2001. His retirement benefits, once valued at $68 million, now total under $2 million. He also owns tens of millions of dollars of illiquid assets, mainly real estate.

In one year, Mr. Lay has been transformed from a centimillionaire with huge stock holdings to a multimillionaire whose wealth is mostly tied up in hard-to-sell assets.

While the records may provide a defense against a criminal charge, it is unclear how much they may help in civil lawsuits. Shareholders have sued him, and just last month Enron creditors sued him, contending that the stock sales to the company constituted a ''fraudulent conveyance'' of corporate assets.

The records show that in 1997, Enron shares made up more than 90 percent of his liquid assets. Even his largest illiquid asset -- a family partnership, in which he owned an interest then valued at $47.9 million -- was largely invested in Enron.

His advisers said they pressed Mr. Lay to diversify, and in late 1999, he did so, largely with borrowed money.

Virtually all of Mr. Lay's marketable investments were pledged as collateral to back margin loans from institutions like PaineWebber, First Union and Compass Bank, a regional bank. He had multiple lines of credit at Bank of America, including a $40 million line for him and his wife, $10 million for a family partnership and $11.7 million to allow him to buy 2.5 percent of what became the Houston Texans football team.

Throughout 2000, those credit lines underwrote the purchase of new investments. Following his strategists' advice, Mr. Lay placed millions with money managers, including Goldman, Sachs; Cypress Asset Management: the TCW Group; and Fayez Sarofim & Company in Houston. Millions more went to mutual funds and other public investments.

ULTIMATELY, the strategy failed the basic tenets of diversification, because it depended on Enron's share price climbing. If it simply held even, Mr. Lay's returns would be diminished by his loan interest.

Using margin can supercharge an investment; an investor can hang onto shares while using them for other investments. But margin also allows for supercharged losses. If the pledged security falls in price, the investor's portfolio can be liquidated to pay down the debt.

That is what Mr. Lay kept trying to avoid in 2001.

According to his bank agreements and other records, the possibility of margin calls grew if the share price dropped below $80; if it fell below $60, he would almost certainly be in violation of the loan terms. The stock hit the first trigger by January 2001; by March, Enron shares traded in the high 50's.

Beginning in February, Mr. Lay started to head off margin calls and avoid having to sell Enron stock, one adviser said. First, lenders were persuaded to increase the ''loan-to-value ratio,'' meaning that Enron shares could fall further before prompting margin calls. And one institution, Compass Bank, accepted a multimillion-dollar illiquid investment as collateral. Both negotiations, the adviser said, were viewed as a success for Mr. Lay. With Enron's stock price tumbling, though, he had to sell far more shares later.

''There was no concern, no worries that Enron was going to collapse,'' one adviser who spoke often with Mr. Lay said of that period. ''Every step along the way, we felt like today is the bottom and tomorrow is going to be better.''

Mr. Lay's advisers also began liquidating the non-Enron portfolio to pay down debt. (Two of his largest non-Enron holdings -- in Eli Lilly and Compaq Computer -- could not be sold at the time, because they were restricted shares granted to Mr. Lay as a director of those companies.)

By June 2001, Enron shares had fallen into the $40's, and Mr. Lay and his advisers set out to deal with his credit squeeze once and for all. They turned to Enron.

Under terms of a corporate line of credit, he could borrow up to $4 million and, if he chose, pay it back with Enron shares held at least six months. This mechanism let Mr. Lay dispose of Enron stock without immediately disclosing it; a lawyer had told him that these transactions need not be disclosed until after year-end.

Sometimes, Mr. Lay delayed repayment for days or weeks. In those instances, one adviser said, Mr. Lay believed that Enron's stock price had hit a bottom and so was betting that he could soon repay the loans with fewer shares.

Through June, Mr. Lay sold $28 million in Enron stock this way, bringing his total obligations to the banks and brokerage firms below $50 million. But he offset some sales by exercising options for 50,000 Enron shares and holding them -- another sign of faith in the stock.

On July 31, Mr. Lay sent written instructions to PaineWebber to halt his daily sales of 2,500 shares. Mr. Lay believed that he was losing money by selling too cheaply, but his advisers disagreed.

''That was another source of income to help deal with some of these margin calls and other issues,'' one adviser said. ''It just shut off another spigot.''

On Aug. 14, Jeffrey K. Skilling, then the chief executive, resigned, sending the stock plummeting anew. Almost immediately, Mr. Lay received new margin calls, just as Ms. Watkins sent him her now-famous letter asserting accounting problems.

Most attention has focused on Mr. Lay's trading after this point, and prosecutors must still decide whether Ms. Watkins's information was enough to compel Mr. Lay to stop all sales, even to the company. But Mr. Lay's records strongly suggest that his sales had nothing to do with Ms. Watkins's information.

As the stock kept sinking, he repeatedly tapped his Enron credit line -- borrowing $12 million more in August and $4 million in early September. Sometimes he repaid immediately with Enron shares; sometimes he waited weeks, apparently in hopes of a rebound.

Soon, Mr. Lay began abandoning investments that would have required cash contributions -- money he could have raised by selling Enron shares.

On Sept. 21, the same day lawyers briefed him on their investigation of Ms. Watkins's accusations, Mr. Lay used a new $10 million incentive payment to pay down debt. In other words, he turned over cash instead of selling Enron stock, another bet that the shares would turn around.

THEY never did. In mid-October, Enron said it was restating its earnings because of problems associated with off-the-books partnerships. The stock fell sharply, and Mr. Lay received more margin calls. Every day from Oct. 23 through Oct. 26, he borrowed on his Enron credit line to meet the demands, repaying the debt with stock.

The Oct. 26 sale, at $15.40 a share, was his last. Because of his insistence that shares be sold only to satisfy margin calls, advisers said, Mr. Lay held on to 1.2 million shares -- and some five million vested options -- as the price dove toward zero.

''He was always a bull on the stock,'' one adviser said, ''right up to the day that the company filed for bankruptcy.''